Porter and Value Chains

How Does Organizational Strategy Determine Information Systems Structure?

Information systems exist to help organizations achieve their mission and vision. mission and vision in turn drive an organizations goals and objectives.  Think of these goals and objectives as more discrete tasks and accomplishment that together will help achieve mission and vision.  We have already discussed  about how structure and culture impact organizations.  The more detailed goals and objectives are also impacted heavily competitive strategy. Author Michael Porter proposes that competitive strategy therefore determines the structure, features, and functions of every information system.

 

Organizations  asses the competitive nature of their respective industries and determine appropriate  competitive strategy.  This strategy determines appropriate  value chains, which, in turn, will determine business processes. The structure of related business processes in turn determines the design of supporting information systems.

Porter – Five Forces 

Based on porters five forces. Competitive rivalry within an industry has 4 items pointing to it: Bargaining power of suppliers, Bargaining power of customers, Threat of new entrants, and threat of substitute products.
Porters Five Forces

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Competitive Strategies

  • Lowest cost across the industry
    • Lowest cost within an industry segment
  • Better products across the industry
    • Better products within an industry segment

 

Competitive Forces

  • Competition from vendors who manufacture substitutes
  • Competition from new competitors
  • Competition from existing rivals

Bargaining Power Forces

  • Bargaining power of suppliers
  • Bargaining power of customers

 

Some Examples:

Bargaining power of Customer: Strong or weak

GM buying Auto Paint from a supplier would have a strong or weak force?

Your ability to change policy or procedure at the university?

You booking Air Travel?

 

Bargaining Power of Suppliers:  Strong or weak

  • New car dealer
  • Airline   (What mitigates?)
  • Farmer (surplus year?)

Competition from new competitors

Similar Product/Technology

  • MS Visio vs Draw.IO
  • Surface vs IPAD
  • Phone Market?

Competition from existing rivals

  • Those you are competing against today
  • MS Dynamics ERP vs Oracle, SAP, Infor
  • vs NetSuite?
  • Penn State Vs. Temple ?
  • Used Car Dealers

Competition from vendors who manufacture substitutes

What is a substitute vs a new entrant?

A substitute product uses a different technology or method to fill the same economic need.   Same Customers, but getting them to switch to a new product that replaces the old one. Examples:

  • Meat; Beyond Meat, Impossible Burger
  • Landlines; cellular telephones
  • Airlines (when they arrived); automobiles, trains, and ships
  • Beer and Wine; Hard Seltzer/Ciders
  • Tap water is a substitute for Coke, but Pepsi is a product that uses the same technology (albeit different ingredients) to compete head-to-head with Coke, so it is an existing rival not a substitute. Increased marketing for drinking tap water might “shrink the pie” for both Coke and Pepsi, whereas increased Pepsi advertising would likely “grow the pie” (increase consumption of all soft drinks), while giving Pepsi a larger market share at Coke’s expense.
  • Market Makers vs Existing Markets?  Solving an existing problem vs a new one?

How do barriers of entry factor into this conversation?

  • Capital Investment – I invest in a lot of infrastructure (utility)
  • Blocking legislation (utility) –  then deregulation?
  • Notoriety
  • New NFL team?
  • New Utility?
  • New Car Manufacturer?

 

 

Porter’s Value Chain Analysis

Porter’s Value Chain Analysis is an approach to view the major processes of an organization focused on the systems and activities with customers at the center. This system links systems and activities to each other and demonstrates what effect this has on costs and profit. Value Chain Analysis helps to identify  where the sources of value and loss amounts can be found in the organization.

 

Porter describes a value chain as a collection of activities that are performed by a company to create value for its customers. Value Creation creates added value which leads to competitive advantage. Ultimately, added value also creates a higher profitability for an organization.

Porter’s Generic Value Chain which is depicted below is useful also to help us as a model to start breaking down an organizations processes and often provides a useful first step in analysis

 

Based on porters five forces, a model of support activities and primary activities are shown.

Michael Porter’s Value Chain

Author: Denis Fadeev

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Value Chain activities

Primary activities have an immediate effect on the production, maintenance, sales and support of the products or services to be supplied. These activities consist of the following elements:

Inbound Logistics

These are all processes that are involved in the receiving, storing, and internal distribution of the raw materials or basic ingredients of a product or service. The relationship with the suppliers is essential to the creation of value in this matter.

Production

These are all the activities (for example production floor or production line) that convert inputs of products or services into semi-finished or finished products. Operational systems are the guiding principle for the creation of value.

Outbound logistics

These are all activities that are related to delivering the products and services to the customer. These include, for instance, storage, distribution (systems) and transport.

Marketing and Sales

These are all processes related to putting the products and services in the markets including managing and generating customer relationships. The guiding principles are setting oneself apart from the competition and creating advantages for the customer.

Service

This includes all activities that maintain the value of the products or service to customers as soon as a relationship has developed based on the procurement of services and products. The Service Profit Chain Model is an alternative model, specific designed for service management and organizational growth.

 

Support activities of the Value Chain Analysis

Support activities within the Porter’s Value Chain Analysis assist the primary activities and they form the basis of any organization. In the figure dotted lines represent linkages between a support activity and a primary activity. A support activity such as human resource management for example is of importance within the primary activity operation but also supports other activities such as service and outbound logistics.

Firm infrastructure

Human resource management

Technology development

Procurement

 

 

Value Chains

 

A table showing primary activities within Porter’s generic value chain
Primary Activities Description
Inbound Logitistics Receiving, storing, and disseminating inputs to the product.
Operations/Manufacturing Transforming inputs into the final product.
Outbound Logistics Collecting, storing, and physically distributing the product to buyers.
Sales and Marketing Inducing buyers to purchase the product and providing a means for them to do so
Customer Service Assisting customer’s use of the product and thus maintaining and enhancing the product’s value.

 

Primary Activities in the Value Chain – The goal of the five sets of activities is to create value that exceeds the cost of conducting that activity, therefore generating a higher margin.

To understand the essence of the value chain, consider a supplier, a medium-sized drone manufacturer

  • First, the manufacturer acquires raw materials using the inbound logistics activity. This activity concerns the receiving and handling of raw materials and other inputs. The accumulation of those materials adds value in the sense that even a pile of unassembled parts is worth something to some customer. A collection of the parts needed to build a drone is worth more than an empty space on a shelf. The value is not only the parts themselves, but also the time required to contact vendors for those parts, to maintain business relationships with those vendors, to order the parts, to receive the shipment, and so forth.
  • In the operations activity, the drone maker transforms raw materials into a finished drone, a process that adds more value. Next, the company uses the outbound logistics activity to deliver the finished drone to a customer. Of course, there is no customer to send the drone to without the marketing and sales value activity. Finally, the service activity provides customer support to the drone users.
  • Each stage of this generic chain accumulates costs and adds value to the product. The net result is the total margin of the chain, which is the difference between the total value added and the total costs incurred. Figure 3-7 summarizes the primary activities of the value chain.
My Hat Company Primary activities and supporting activities. Margin = value - cost. Margins occur between every primary activity to the next, and also between the supporting activities.

What is Margin?   My Hat Company Financial Model

My hat financial model, profit and loss.

 

Based on Porter how do we create competitive advantage?

Competitive Advantage

Product Implementations

  1. Create a new product or service
  2. Enhance Products or services
  3. Differentiate products or services

Process implementations

  1. Lock in customers and buyers
  2. Lock in suppliers
  3. Raise barriers to market entry
  4. Establish alliances
  5. Reduce costs

 

A short Case to help understand Porter’s models.

SUNCamp, Inc., is a small business owned by a couple from San Francisco, CA.  Owen and Opal Roberts manufacture and sell a folding set of solar panels and batteries that are used by recreational campers to generate electricity in the wilderness. The panels can be folded to a compact form factor and are favored by backpacking enthusiasts and campers worldwide. Owen previously worked as a solar engineer and invented and patented a new type of solar panel that captures solar energy more efficiently than any of their competitors. Opal, an industrial designer by training, developed the elegant folding design that features a small form factor when folded, and a large surface area to capture sunlight when unfolded and deployed.  SUNCamp is small, lightweight, easy to set up, and very efficient. Owen and Opal manufacture the panels in a small workshop in rented space and purchase batteries from a partner.  They sell directly to their customers over the Internet and via phone.

  • How could an analysis of the five competitive forces help SUNCamp.
  • What does their competitive strategy seem to be?
  • Briefly summarize the primary value chain activities for SUNCamp. How should the company design these value chains to conform to its competitive strategy?
  • Describe business processes that SUNCamp needs to implement its marketing and sales and service value chain activities.
  • Describe, in general terms, information systems to support your answers.

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